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The privatisation of water companies in England and Wales was supposed to bring efficiency and investment to a vital sector that had been starved of public funding. But since 1989, the industry has failed to invest sufficiently in replacing antiquated pipes and sewage treatment systems.
Rivers and seas have become increasingly polluted with raw sewage. Meanwhile, dividend payments, funded by water companies loading up on corporate debt, have soared.
The largest of those companies, Thames Water, has debts of almost £14 billion – roughly 80% of the value of the assets of the business. Rising inflation and interest rates mean this debt is increasingly expensive to service, let alone reduce.
If Thames Water collapses, the UK government is likely to step in and manage the company through a special form of business administration to ensure 15 million customers continue to receive their water and sewerage services. But state involvement would probably be temporary, with the aim of an eventual return to the private sector.
Many would see this as a missed opportunity to do things differently. There are already groups calling for Thames Water to be renationalised and brought into public ownership to remove the company’s profit motive and the pressure of paying dividends to shareholders. Instead, the theory goes that, as a local natural monopoly, Thames Water ought to be run as a publicly owned utility fully focused on providing a public service.
But doing this would be far from straightforward. To begin with, it would involve the transfer of corporate debt onto the government’s own balance sheet, which could dramatically constrain spending on other public services, such as the NHS and education.
Another complication comes from the fact that an administration process usually involves attempts to raise funds from the sale of company assets to pay off debts. But in the case of a water company, those assets are part of an integrated and complex infrastructure. It would not be practical to break up those assets if any new company was to go on providing water and sewage services to the public.
Renationalising Thames Water would therefore require the government to buy the assets. But the cost of doing so could be enormous, and the current shareholders would need to be adequately compensated. These include investors like pension funds, which the government would find politically hard to ignore.
And even though governments can generally borrow more cheaply than private sector companies (or even deal with its own debts by printing money), these options are not attractive. They could be inflationary, and would risk a negative response from the financial markets. Renationalistation could end up being seen as an expensive acquisition that brings no new money to improve the water industry.
An alternative would be to sell the assets to a new private company or investor. But existing water companies are unlikely to be considered suitable buyers on competition grounds (and many already face similar problems as Thames Water). Demands for significant future investment to meet tighter environmental standards are also likely to deter other investors.
A more attractive option might be to create a new kind of water provider – a bit like an unusual one that already exists in Wales.
Welsh Water has a unique corporate structure, with no shareholders and is run solely for the benefit of its customers. It is commercially run, with professional managers held to account by 62 independent trustees. While not perfect, its performance in recent years compares favourably with that of the other privatised water companies.
Welsh Water’s decisions are made not in the interest of profit-seeking shareholders but in the interests of broader society. Any profits made are either reinvested or returned to its 3 million customers in the form of cheaper services.
Creating such an organisation would not be easy. But there is a precedent in the case of Network Rail, a similar trustee-governed organisation, which was created when its commercial predecessor Railtrack went bust. Railtrack’s debts were subsumed into Network Rail, which were underwritten by the government (while initially staying off the public sector balance sheet). This change in ownership structure led to significant improvements on Railtrack’s atrocious safety record and reduced the cost of rail operations too.
A move towards the Welsh Water model would be in line with recent calls to turn all water firms into democratically run companies focused on public benefit. If renationalisation is considered to be too tricky politically and not viable economically, other solutions are available.
And while it is true that these public-interest companies are funded by debt, a government debt guarantee helps keep the costs of servicing this debt down (while costing the government very little). By not renationalising, the UK economy would avoid many considerable challenges – and a hefty water bill.
J. Robert Branston has received funding from Bloomberg Philanthropies and several other health related charitable organisations. He is a non-active member of the Liberal Democrats.
Phil Tomlinson receives funding from the Engineering and Physical Sciences Research Council (EPSRC) for Made Smarter Innovation: Centre for People-Led Digitalisation, and the Economic and Social Research Council (ESRC) for an Interact project on UK co-working spaces and manufacturing.
Britishvolt, the would-be electric vehicle (EV) battery maker that recently went into administration, always faced an uphill struggle. The start-up had no track record developing technology and never confirmed how it would raise the £3.8 billion needed to start mass producing batteries, which reduces the average cost per battery.
The proposed facility near Blyth, a coastal town in north-east England, was slated to contribute around a quarter of what the UK automotive industry needs, or enough for 330,000 battery packs a year. But with no major auto firms as customers, its business model always looked vulnerable.
This was despite keen promotion from Boris Johnson when he was prime minister and a pledge of £100 million in public funding if certain conditions on the factory’s construction were met. They weren’t, and the government kept the cash.
There remains hope that new ownership could rescue the business and that batteries for EVs could still be assembled at the site. For now, though, Britishvolt’s woes raise wider questions about the future of the UK automotive industry as it transitions to making EVs, and whether the government is doing enough to support it.
For the UK to become a leader in EV manufacturing, it needs large factories (called gigafactories) making EV batteries and quickly, as demand for EVs is taking off ahead of a 2030 ban on new petrol and diesel cars, and the requirement for all new cars to be fully zero emission by 2035. This is particularly urgent given the nature of the trade and cooperation agreement (TCA) between the UK and the EU.
The TCA requires that batteries in EVs have to be assembled in the UK or the EU by the end of 2026 for vehicles traded between the two to avoid tariffs. The UK is lagging well behind EU countries in attracting investment in battery-making, and Britshvolt’s collapse throws this into sharp relief.
Without a major effort to build a domestic supply chain that includes battery manufacturing, UK car assembly lines will increasingly be left producing obsolete internal combustion engine cars and dependent upon imported battery components from the EU to meet rules of origin requirements. That isn’t going to make much business sense.
In recent years, a lot of investment in battery gigafactories has skirted the UK, partly because of uncertainty caused by Brexit. Tesla boss Elon Musk said as much in late 2019 when justifying his firm’s decision to build its first major European gigafactory in Germany.
Along with Arrival’s decision to shift electric van production to the US and Mini pulling the plug on EV production in Oxford, for now at least, government hopes for the UK auto industry as an EV powerhouse seem stuck in neutral, if not reverse. The one piece of good news so far is that battery maker Envision has committed to a new gigfactory in Sunderland that will come onstream in 2025 – the only confirmed investment in the UK.
In a good year, the UK makes between 1.3 and 1.5 million cars. As the industry seeks to supply UK and EU markets in which petrol or diesel vehicle sales are being phased out from 2030, maintaining a similar level of production will require a lot of batteries.
The UK has been slow to get government support lined up for such investment. So far, only £800 million has been earmarked for the mass production of EV batteries. Demand for EV batteries in the UK could reach as high as 130 gigawatt-hours (GWh) a year by 2040, equivalent to the output of eight gigafactories with a capacity of 15GWh each. Meeting this demand would require an investment of between £5 billion and £18 billion by 2040 according to one estimate.
Meanwhile, there are at least 35 gigafactories up and running or under construction in the EU, including those by NorthVolt (in Sweden), Saft/Stellantis (in France and Germany), Samsung SDI (in Hungary), LG Chem (in Poland), and Tesla (in Germany).
The European Commission and seven member states have allocated around €6 billion (£5 billion) to help build up to 20 gigafactories and aim at having one-third of the world’s EV batteries being made in the EU by 2030. This is expected to serve an estimated €250 billion-a-year market by that time. EU member states are simply doing more to attract investment in battery production than the UK, with heavy financial support and special economic zones to woo manufacturers.
If the UK auto industry is to compete, it will need to produce its own batteries at scale. Domestic battery production will reduce supply chain costs and ease logistical difficulties. It should also help UK-based carmakers and battery manufacturers work more closely in areas such as battery cell technology and technician training – critical to the industry’s competitiveness.
For this to be possible, the government must think more creatively about how to target financial support for car and battery makers. And, in turn, the auto industry needs a more active industrial strategy and closer partnerships with government, especially with regards to reorientating skills and the supply chain towards EVs.
This isn’t about picking winners – demand for EVs produced in the UK and internationally is forecast to be there. And increasing UK sales of EVs indicate a growing domestic market for batteries. McKinsey consultants forecast that by 2040, battery demand for European EVs will reach 1,200GWh per year, or the output of 80 gigafactories with an average capacity of 15GWh.
The UK risks missing out on new investment in a growing industry. If the UK wants to maintain its large automotive assembly capacity as it transitions to making EVs, then it will need homemade batteries and on a large scale. Only a revamped industrial strategy can help make this happen.
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David Bailey receives funding from the Economic and Social Research Council's (ESRC) UK in a Changing Europe programme under grant number ES/X005844/1.
Phil Tomlinson receives funding from the Engineering and Physical Sciences Research Council (EPSRC) for Made Smarter Innovation: Centre for People-Led Digitalisation, and the Economic and Social Research Council (ESRC) for an Interact project on UK co-working spaces and manufacturing.
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